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Working from home is great. The tax complications? Not so much.
Last year, 13 percent of full-time employees in the U.S. worked from home and 28 percent worked a hybrid model. Many of them worked in a different state than the one in which their employer was located. That’s millions of Americans who will face complicated income tax situations this filing season—some even getting taxed twice.
Where Is Income Taxed?
Generally, income can be taxed where you live and where you work. If those are the same state—as is typically the case with remote and in-person workers—then that’s where you’ll get taxed (with one exception; more on that below). But if you live and work in two different states—say, you live in New Jersey and commute into New York—then you could get taxed in both.
Thankfully, every state with an income tax offers a credit for taxes paid to another state. The catch: it won’t exceed the amount you pay on that income in your home state. So, your income wouldn’t be double taxed, but if the second state has higher income tax rates, you would be paying more than if you worked exclusively from your own state.
When Would I Be Double Taxed?
Five states tax people where their employer’s office is located, even if they work remotely and never set foot in the state. This is called the “convenience of the employer” rule, and Connecticut, Delaware, Nebraska, New York, and Pennsylvania have it, though they differ on the details.
If your employer is based in one of these states, but you’re working elsewhere for your convenience (not because your employer requires it), then you might pay income taxes both in the state where you live and work and in the state where your employer is based, without an offsetting credit.
For example, say your company is based in New York but you work remotely in California. Because you live and work in California, the state expects you to pay taxes on the income you earn there. But because New York has a convenience rule, it also expects you to pay taxes on the income you earn through your New York-based company. You’d pay income taxes to both states.
What If I Commute across State Lines?
For the hybrid or in-office workers commuting across state lines, tax season could bring headaches. While living in one state and exclusively working in another just means you have to file two income tax returns and receive a credit, splitting your work days between different states means you owe taxes proportionate to the time worked in each state. Calculating that can get messy.
Luckily, there’s a solution—state reciprocity agreements. Under these agreements, neighboring states decide to tax cross-border workers only in the states where they live. There are currently 30 reciprocal agreements across 16 states and the District of Columbia (to see if your state has one, click here).
Not only do reciprocity agreements benefit workers, but they’re also good for states themselves. Higher-tax states can maintain job opportunities while lower-tax states can attract residents—and both would enjoy easier administration and reduced compliance costs for their taxpayers.
Remote and hybrid work arrangements are modernizing the U.S. economy; state policymakers should modernize their tax codes with it.
Note: This post is for informational purposes only and not intended as advice. Please talk to a designated tax professional before making tax planning decisions.
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FAQs
If you have remote employees who reside within the state your business is registered in, you'll need to withhold state income taxes from their earnings and submit state unemployment insurance (SUI) tax in your state. Depending on your state, you may also need to withhold local income tax if their location requires it.
How do taxes work for hybrid employees? ›
While living in one state and exclusively working in another just means you have to file two income tax returns and receive a credit, splitting your work days between different states means you owe taxes proportionate to the time worked in each state.
How are you taxed if you work remotely? ›
Remote workers have to pay two types of taxes: federal (or national) and regional. The federal (national) taxes are those paid to the overall government, while the regional taxes are paid at a state, local, or provincial level. Those taxes will often apply to wherever you receive an income.
Do remote workers get taxed twice? ›
Can a remote worker be taxed twice on income? Yes, if the remote employee/contractor is in the US and works for an employer based in a convenience rule state.
How to handle payroll taxes for remote employees? ›
Taxes for remote employees
But when it comes to US-based taxation, you have to pay the local taxes in the state they work — not where your company is registered. But in case the location is the same for both, you will need to withhold state income taxes and instead pay state unemployment tax in your state.
What happens if I work remotely and my company is in another state? ›
Where do I pay state taxes if I live in a different state than my employer? As a remote worker, you must pay tax on all your income to the state you live in (if your state has personal income tax). This is true no matter where your employer is located.
Is there a tax break for a hybrid? ›
Tax Credits and Incentives
Some all-electric and plug-in hybrid vehicles qualify for a $3,700 to $7,500 federal tax credit. Many states also offer additional incentives for purchasing new EVs.
How do I write off remote work on my taxes? ›
Utilize the Simplified Option for Home Office Tax Deductions
Instead of calculating actual expenses, you can use a standard deduction based on the square footage of your home office. As of the last update in 2022, the rate is $5 per square foot, up to a maximum of 300 square feet.
Are remote workers 1099 employees? ›
If you're a remote employee, your employer should have asked you to fill out W2 paperwork when you first started. This form determines how much your employer will automatically deduct from your paychecks in taxes. If you're an independent remote contractor, you're considered self-employed and a 1099.
Which state law applies to remote workers? ›
The short answer is that remote employees are generally subject to the laws in the state in which they are actually working. However, the California based employer still must follow certain California laws, for example, issuing correct wage statements, reimbursing business expenses employees incur, etc.
Other state tax credit Credit code 187
You may claim this credit if you had income that was taxed by California and another state. The credit will offset the taxes paid to the other state, so you are not paying taxes twice. This credit applies to: Individuals.
How do I know if I am double taxed? ›
Double taxation refers to income tax being paid twice on the same source of income. This can occur when income is taxed at both the corporate level and the personal level, as in the case of stock dividends. Double taxation also refers to the same income being taxed by two different countries.
Am I allowed to work two remote jobs? ›
Yes, you absolutely can have two remote jobs and there are many people who have been successful in doing so. In fact, there have been numerous personal stories in some large publications sharing why people have two remote jobs, how they are managing that, and those individuals' views on it.
Can hybrid workers claim tax relief? ›
The strict boundaries for deduction applicants mean many of the near-75% of US employees who worked in 2022 with a hybrid model likely won't be eligible for this deduction; a figure according to a survey from the International Foundation of Employee Benefit Plans.
How can an employee pay less taxes? ›
There are a few methods recommended by experts that you can use to reduce your taxable income. These include contributing to an employee contribution plan such as a 401(k), contributing to a health savings account (HSA) or a flexible spending account (FSA), and contributing to a traditional IRA.
Are remote work stipends taxable? ›
Work-from-home stipends are usually taxable income
In the US, all monetary compensation is taxed regardless of whether it's a salary or stipend. This means work-from-home allowances are taxed just like income.
Is there a tax deduction for working remotely? ›
If you're a regular employee working from home, you can't deduct any of your related expenses on your tax return. In the past, you could claim an itemized deduction for unreimbursed business expenses, including expenses for the business use of part of your home if they exceeded 2% of your adjusted gross income.
Is a hybrid work schedule beneficial? ›
The key advantages here are flexibility and autonomy – workers have control over their work schedules. This can help with employee retention and satisfaction. Letting employees decide where they work communicates that their employer trusts them.
How does hybrid work benefit employers? ›
This has led to increased productivity, reduced costs, and improved employee engagement and satisfaction. Another key benefit of a hybrid work model is the ability to attract and retain top talent. With the rise of remote work, many employees are looking for companies that offer flexible work options.
Do I have to pay California state income tax if I work remotely out of state? ›
You are ultimately taxed on all income as a resident, and California-sourced income as a part-year resident or nonresident. Any state you move to, even temporarily, may have an income tax requirement for anyone working in their state.
